Tax relief when shares make a loss
There is a very useful tax relief that can convert a capital loss from a failed equity investment in an unquoted trading company into an income tax loss. That loss can then be set against your taxable income and generate a repayment of income tax for you.
If you lend money to the company, and the business fails, you may be able to claim capital loss relief for the uncollectable debt, but the tax relief won’t reduce your income tax bill. To achieve an income tax repayment, you need to subscribe for new shares in the company. You won’t get share loss relief on the value of second-hand shares that you have purchased from another shareholder.
Your shares must be part of the company’s ordinary share capital, which excludes shares which are only entitled to a dividend at a fixed rate. Preference shares entitled to a fixed rate of dividend won’t qualify, but deferred preference shares may, if the amount of dividend potentially payable per share is not fixed.
We can advise you on how to structure your investment in order to protect any tax relief, just in case the business fails.